The 8 Critical Components of a Financial Plan for High Net Worth Clients

The 8 Most Critical Components of a Financial Plan for High Net Worth Individuals

Why Your Plan Needs All8 Components to Provide the Security You Want

Every financial advisor and wealth manager will present you with a financial plan based on the information you bring to them.

On the surface therefore, every financial plan seems to include an air of customization. The surprising reality is somewhat different. Almost every financial advisor – especially those from big investment firms with branches dotting the country like fast food franchises – will give you a plan that’s very similar to the ones they offer to everyone else.

Almost all of them will recommend the same split between equities and bonds. Almost all will promise rebalancing. Almost all will talk about asset allocation based upon your risk tolerance.

But is this really all it takes to create a financial plan?

Are these actually the most critical components of a financial plan?

Is this truly what it means to customize a plan for your unique situation?

8 Foundations of Every Financial Plan

If you want a truly customized plan that gives you the security and peace of mind that you’ll be able to achieve all your financial and lifestyle goals and aspirations, there are eight essential components, four of which form the core foundation. All the other details proceed from these.

A customized financial plan:

1. Begins with Personalized and Specific Goals

“I want to retire comfortably” is not a personalized or specific goal. Neither is “I want to earn x% growth per year.”

Personalized goals are lifestyle goals. What do you want out of life? What do you hope to accomplish before, during, and after retirement? How do you want your money to serve you in the next 20, 30, 40 years?

This includes purchases you want to make, homes you want to live in, travel, legacy, and charitable gifts. It also incorporates your day-to-day lifestyle, which determines your monthly income needs. In retirement especially, this question is critical.

Once you’ve clarified what you actually want to achieve in terms of lifestyle, the rest of your financial plan can be built out from there. With this approach, a plan can be created to ensure with as much certainty as possible that you will achieve those personalized lifestyle goals.

See the point here? If you’re achieving everything you want out of life as it relates to money and lifestyle, then your plan is working. Your investment performance exists to serve your lifestyle, not serve itself.

2. Uses Extensive Historical Data

When typical financial planners look at your assets, they’ll use some kind of model to make projections about how much you can expect to earn each year according to their financial plan.

The problem with this is, if their plan doesn’t follow the model upon which it’s based, then it’s worthless. Yet this is what almost every financial planner does, often without realizing it.

Some models use historical data that goes back 20 years. Well, that barely touches the dotcom collapse. Others go back 30 years. That no longer includes Black Monday from 1987.

For truly reliable historical data on which to base a plan, you need to extend it all the way back before the Great Depression. Pillar’s model begins in 1925. Now your plan will be based on data that includes multiple major wars, inflationary periods, presidential upheavals, one-day crashes, multiple bear and bull markets, and much more. Your financial plan can now be tested against reality from about 100 years.

3. Stress-tested Scenarios

In Pillar’s model, your plan will be stress-tested against 1000 different scenarios. These scenarios are extrapolated from the historical data, which dates back to 1925.

To grasp the enormity of this approach to financial planning, you have to start putting these 8 components together. Individually, they don’t accomplish anything. Only by combining them all into a comprehensive financial planning methodology can you extract the value – the peace of mind – that you want from a financial plan.

So, combining components 1-3, the stress tests apply your specific financial and lifestyle goals through a model based on historical data starting in 1925. If this process reveals that you will accomplish your lifestyle goals, the certainty on which that revelation is based is ironclad. How ironclad? See component #4.

4. Shows You Exceeding Your Goals 75-90% of Scenarios

Obviously there is no 100%. If a meteor the size of Texas crashes into the United States, your financial plan will probably fail.

But your financial plan should be able to show you – based on the historical data – that you will exceed all your lifestyle goals in between 75-90% of these stress-test scenarios. All your goals. Not some of them. And you’re exceeding your goals. Not just meeting them.

That means you have extra cushion built in to your plan.

If your plan exceeds your goals in 75-90% of these stress tests, which we call the Comfort Zone, you can have great confidence and peace of mind about your future. You can relax, enjoy life, and know you’ll be taken care of.

Building Upon the Foundation of Certainty

These first four components of your financial plan are the most critical. Everything else builds on those. Incidentally, these first four are also the ones most financial planners get wrong, or don’t even utilize.

These next four components make up the second layer of your foundation. Built upon the first, they are just as important if your plan is to succeed and sustain itself over the rest of your life.

Why? Because every plan looks great at first sight. Just like everyone feels great optimism and excitement at the start of a long hike or a marathon. But what happens ten years later? What happens when half your goals have become obsolete and replaced by new ones you hadn’t even thought of when you first developed your plan? What happens if your financial situation suddenly changes (for better or for worse)?

That’s what the next four critical components of financial plans address.

5. Allocates Your Assets Based On Your Goals

Asset allocation is, according to multiple experts, the most critical component of any investment plan. Remember the context here though. Your investment plan is a subset of your financial plan. The first four components listed above comprise the core foundation, as already stated.

Out of that foundation, we develop your investment plan, which begins with asset allocation.

Your allocation is based on your risk tolerance, in part. But your risk tolerance also is subject to your goals and the results of your stress tests and the historical data. Too many advisors just ask you what your risk tolerance is, with zero context and with nothing other than hunches and personal preferences to guide you.

This is worthless.

Your risk tolerance – in a financial plan of the sort we’re discussing – is in one sense not even up to you. Your risk tolerance flows out naturally from the results of your stress tests and goals. If a conservative allocation allows you to accomplish all your goals, then your risk tolerance is conservative. If a moderately aggressive allocation at this point in your life is what helps you accomplish your goals, then that’s your risk tolerance.

For instance, we had a client come to us once whose previous managers believed they could outperform the market. (Hint: That’s a major warning sign you need a new advisor. For all 7 warning signs when choosing a financial advisor, click here) [link to Ultimate Guide]

That manager opened eight accounts with various money managers, all of them positioned for massive growth allocating 100% of his assets in equities. No bonds. Only one of eight beat the market. And this is not unusual at all. [link to blog 1 – outperforming market]

After running his lifestyle goals and plans through our process, we found this client only needed 30% of his assets in equities. Far from 100%! With a conservative asset allocation, he would have lower taxes, all his investments in one place, peace of mind, and assurance he would achieve what mattered most to him.

His risk tolerance was revealed by his plan. It did not determine his plan.

See the difference?

6. Rebalances Regularly

With great asset allocation comes great responsibility to rebalance.

Not all your assets will perform as expected. Some will do better, some will not. But the allocation is what keeps the plan safely intact in 75-90% of your stress test scenarios. So a critical component of your financial plan is to rebalance your assets regularly to preserve that financially secure asset allocation.

7. Pays You Predictable Monthly Income

The only way to have true peace of mind – even during retirement, is with assured monthly income. Thus, your financial plan must include a monthly amount you can count on just as if it were a paycheck.

This income must be enough to sustain the lifestyle you outline in your goals. It must also be an amount that keeps you within the 75-90% Comfort Zone we keep referring to.

Again – are you seeing how all these components of your financial plan work together to produce the secure, focused, and successful lifestyle you want?

Thus, if your financial plan doesn’t get updated regularly, its relevance begins to diverge from your life until eventually it disconnects altogether. For instance, suppose your initial financial plan allocated a sizable portion of wealth to send two of your grandkids to the most elite universities.

But then, one grandkid lands a full-ride scholarship, and the other decides on a different life path and doesn’t need the money. Now you’ve got hundreds of thousands of dollars you weren’t anticipating having. And suppose on top of that, you get divorced.

Just these two events will upend your entire financial plan. Those extreme (though very common) examples highlight the many more small events that slowly erode every financial plan over time.

At Pillar, this includes re-running the 1000 stress tests to make sure your financial plan remains on track – according to your updated lifestyle goals and situation. Again, these eight components of a financial plan must function as a single unit, not in isolation. Hopefully you’re starting to perceive the depth behind this approach.

Non-Critical Components of a Financial Plan

What you don’t need in your plan are:

Projections or goals for a specific rate of return

Pre-packaged products (especially ones with high fees, which most of them have)

Non-data-backed goals like trying to outperform the market

Your plan is based around your lifestyle goals, and how your money can help you achieve them. Using the stress-tested historically-backed approach, you have that security baked into the plan regardless of how your specific performance looks.

Your performance matters – it’s how we achieve the plan. But the performance itself is not the plan.

If you want a financial plan created for you based on these eight foundational components, personalized for your specific situation, start a conversation with Pillar today.

If you want a cookie-cutter plan that’s the same for someone with $50,000 in assets as it is for someone with $50 million, then visit your local franchise. And grab a burger with fries while you wait.